Election Year Impact on the Market

Investors are constantly testing theories and searching for patterns in an effort to predict the market. Recent theories have been based on wildly diverse indicators ranging from the hemline lengths to the NFL conference of the Super Bowl winner. One market predictor that has proven to be accurate is the election cycle.

Historically, market returns have been weaker in the first two years of most presidential terms. The speculation is that this is when the administration makes tougher decisions that may have an adverse impact on the economy and subsequently the market. The market returns during the pre-election and election years are usually stronger, since the administration begins to focus on stimulating the economy in order to stay in power. These trends seem to hold true whether an incumbent is running for re-election or not. The Election Cycle chart shows that in fact, the pre-election years have had higher market returns.

There has been an assumption that a Republican in the White House, who are thought to be pro business, would mean higher returns in the stock market. However, an analysis of the annualized returns from 1945 to 2000, show this to be a false assumption. The Democratic administrations actually have a slight edge in market returns - 15.8% for Democrats compared to 13.1% for Republicans.